City of Ottawa 2009 Financial Statement Audit Results
Ernst & Young LLP 100 Queen Street, Suite 1600 Ottawa, Ontario K1P 1K1 Tel: +1 613 232 1511 Fax: +1 613 232 5324 www.ey.com Members of the Audit, Budget and Finance Committee June 15, 2010 Corporation of the City of Ottawa Dear Members of the Committee, We are pleased to present the results of our audit of the financial statements of the City of Ottawa ( the City ). The audit is designed to express an opinion on the 2009 consolidated financial statements as of December 31, 2009. In accordance with professional standards, we obtained a sufficient understanding of internal control to plan the audit and to determine the nature, timing and extent of tests to be performed. However, we were not engaged to and we did not perform an audit of internal control over financial reporting. We continue to receive the full support and assistance of the City s personnel in conducting our audit. This report is intended solely for the information and use of the Committee, City Council and management, and is not intended to be and should not be used by anyone other than these specified parties. We disclaim any responsibility to any third party who may rely on it. Further, this report is a by-product of our audit of the 2009 financial statements and indicates matters identified during the course of our audit. Our audit did not necessarily identify all matters that may be of interest to the Committee in fulfilling its responsibilities. We appreciate this opportunity to meet with you to discuss the contents of this report and answer any questions you may have about these or any other audit related matters. Very truly yours, Page 1 2009 financial statement audit results A member firm of Ernst & Young Global Limited
Agenda Our client service commitment to City of Ottawa Audit Deliverables Materiality 2009 Audit Strategy Summary Accounting and Audit Updates Audit Findings Summary of Audit Differences Required Communications Appendix A - Independence letter Page 2
Our client service commitment to the City Service quality Continuous communication Right team Audit quality Global audit methodology Effective technical interaction Planning and risk identification Strategy and risk assessment Execution Conclusion and reporting Fair and transparent fees Other permitted services Independence Relevant insight Industry focus Not adversarial Maintaining our objectivity Not cozy Our service commitment Ernst & Young is committed to delivering consistent high-quality client service to the City of Ottawa. Our service commitment is centered on our most critical objective of performing a high-quality audit of the Foundation s financial statements. Additionally, we strive to provide Quality In Everything We Do and recognize that service quality extends well beyond execution of our audit methodology. It is driven by the quality of our team and the effectiveness and value of our communications with management and the Audit Committee. Our overall service commitment to the City of Ottawa is depicted above and is aligned with our Ernst & Young Assurance Service Delivery Approach. Page 3
Audit Deliverables Audit deliverables Opinions Express an opinion on the consolidated financial statements of the City of Ottawa for the year ended December 31, 2009 Express opinion on financial statement of the City of Ottawa related entities in accordance with municipal requirements Express opinions on annual financial statements of OC Transpo Benefit Trust, OC Transpo Benefit Plans and Pineview Municipal Golf Course. Internal control communications Other services Issue a written communication to management and the Audit, Budget and Finance Committee describing any significant weaknesses in internal control identified during our audit. Issue a management letter that provides our recommendations regarding internal controls and opportunities for improvement or efficiency, based on observations made during the course of our audit. This letter will be provided to management after the audit results have been presented. Issue a written communication to the committee about independence matters in accordance with CICA handbook Section 5751, Communications with those Having Oversight Responsibility for the Financial Reporting Process. Perform translation for the French Consolidated financial statements and financial highlights included in the annual report of the City of Ottawa. Page 4
Materiality At the conclusion of the audit, we formulate our opinion on the consolidated financial statements of the City of Ottawa as to their fair presentation in all material respects in accordance with Canadian generally accepted accounting principles. Our estimation of planning materiality involves professional judgment and necessarily takes into account qualitative as well as quantitative considerations. We have performed our audit to a materiality level of $24.2 million ($23.2 million in 2008), which represents approximately 1% of budgeted revenues, consistent with prior years. Page 5
2009 Audit Strategy Audit strategy considerations Area Comments General approach to the audit Using our cumulative knowledge of the client s business, including the results of audit procedures in prior years and the knowledge gained from the current year s procedures that have been completed, we establish a preliminary strategy for placing reliance on controls related to the flows of transactions and/ or significant processes. For purposes of the audit of the financial statements, our audit scope is developed after considering the inherent and control risks and the effectiveness of the City s internal controls. A variety of factors are considered when establishing the audit scope including size, specific risks, the volumes and types of transactions processed, changes in the business environment, and other factors. We distinguish between the following strategies: Identify and evaluate controls (controls strategy) Substantive auditing (substantive strategy) Significant Accounts All accounts of the Company were determined to be significant based on preliminary materiality determination with the exception of Prepaid Expenses. Control based testing Ernst & Young has tested and relied upon controls identified for the Accounts Payable and Expense process to reduce the extent of substantive testing in these areas. Ernst & Young has also performed control testing over the SAP system IT general controls to gain further assurance over system generated reports. Substantive based testing For the remaining significant accounts that have been identified in the planning process, we have taken a substantive approach to perform our audit as we believe that this resulted in an more efficient approach for these accounts based on their nature. Page 6
2009 Audit Strategy Internal Control Reliance Area of Reliance Transaction Level Controls Findings and Strategy As communicated during our audit planning, Ernst & Young has leveraged the use of internal controls were they have been determined to be designed and operating effectively for purposes of the financial statement audit. The execution of our test of control resulted in reliance over the following significant processes for fiscal 2009: Accounts payable Expenses (excluding Payroll expenses) IT General Controls - SAP In accordance with our planning strategy for fiscal 2009, Ernst & Young has reviewed, tested and relied upon IT (systems) general controls over the SAP application. Our reliance on these general controls provides us with additional assurance over the system generated information and reporting. Page 7
2009 Audit Strategy Additional audit strategy considerations Area Comments Use of Specialists During the course of our audit, we relied upon the work of specialists hired by the City for valuation of the opening balance of certain tangible capital asset classes. The City of Ottawa implemented PSAB 3150 for the 2009 fiscal year end. PS 3150 requires that the City to report its tangible capital assets, amortization of the assets and deletions or removal of the assets as appropriate. The specialist used by the City included: RV Anderson Associated Ltd Dillon Consulting Robinson Consultants Ernst & Young has performed the necessary procedures to rely upon the work of these specialists for audit procedures, including confirming the scope and nature of the work performed directly with each specialist. Page 8
Accounting and auditing developments Accounting and auditing developments Summary Effect on the City PS 1200 - Financial Statement Presentation Effective for fiscal years commencing on or after January 1, 2009, PS 1200 became effective for municipal government entities. This standard requires a full accrual basis of accounting and disclosure. The City has implemented the required changes for its fiscal 2009 financial statements. We have audited the City s presentation of its financial statements in accordance with PS. 1200. PS 3150 Tangible Capital Assets PS 3150 requires municipal government entities to record and report on their Tangible Capital Asset s (described In the CICA PSAB Handbook). More specifically, the City is required to report its tangible capital assets, amortization of the assets and deletions or removal of the assets as appropriate. This section is effective for the City s consolidated financial statements ending December 31, 2009. We have reviewed the City s approach for compiling, recording and reporting on its tangible capital assets (TCA) in accordance with PS.3150. The City has adjusted its January 1, 2009 opening TCA balance, accordingly the 2008 comparative figures have not been restated. We have audited the results of the City s TCA process and concur with management s reporting. Tangible capital assets at December 31, 2009 net of amortization totals approximately $10 billion. Page 9
Audit Findings Accounting and auditing developments Tangible Capital Assets Summary Ernst & Young has audited the City s January 1, 2009 opening balance sheet adjustment for tangible capital assets and the related 2009 fiscal activity (additions, disposals and amortization) to arrive at the December 31, 2009 closing balance of $10B. We have reviewed the City s process for accumulating and reporting its capital assets in accordance with PS 3150. This process included the determination of the nature of assets to be included and the related valuation of each. Our audit work focused on the key financial statement assertions related to capital assets, namely: Existence: We have performed substantive audit procedures to validate that assets recorded by the City exist, are capital in nature and are owned by the City. Completeness: We have substantively audited on a sample basis to validate that capital assets have been appropriately included in the records of the City. Valuation: We have substantively audited and relied on the reports of asset valuation specialists to validate the accuracy of the assigned values for recorded capital assets. Presentation and Disclosure: We have audited and assessed the City s presentation and disclosure of the tangible capital balance in accordance with PS 1200 and PS 3150 respectively. Conclusion: Ernst & Young concurs with the City s presentation and recording of tangible capital assets. Page 10
Audit Findings Accounting and auditing developments Pension Accounting OC Transpo Employee s Benefit Plan Summary In 2009, the OC Transpo plan had an estimated deficit of $8M as per the actuarial valuation provided. The amount has been recorded by the City of Ottawa based on an actuarial valuation update prepared at December 31, 2009, and disclosed in the notes to the financial statements. City of Ottawa Superannuation Fund (COSF) In 2009, the COSF plan had an estimated deficit of $22M as per the actuarial valuation provided. The amount has been recorded by the City of Ottawa based on an actuarial valuation update prepared at December 31, 2009, and is disclosed in notes to the financial statements. COSF Indexation In 2005, City Council agreed to provide COSF plan members with indexation, subject to the solvency of the plan, up to 100% over a 5 year period (100% indexation by December 31, 2010). The City s has not recorded this liability at year end due the discretionary nature of the amount and potential range of settlement (nil to $10.4M). As a result, the error related to the financial statements for not recording this liability is an understatement of the accrued obligation (liability) of $10.4M and an overstatement of the equity position of $10.4M. Page 11
Audit Findings Accounting and auditing developments Property Tax Appeals Summary Management has approximated the potential outstanding liability related to property tax appeals as at December 31, 2009 to be $6.7 million. This liability has not been accrued at year end and therefore has been recorded on the summary of audit differences as a judgemental error. This treatment is consistent with prior year as the City has not previously recorded a liability related to ongoing property tax appeals at year end. The net impact of these differences is not material to the financial statements. Page 12
Summary of audit differences During the course of our audit, we accumulate differences between amounts recorded by the City and amounts that we believe are required to be recorded under generally accepted accounting principles. The following is a summary of those differences we have identified through the date of this report. Any material differences in financial statement disclosure are included on the summary of audit differences where applicable. Page 13
Summary of audit differences Error results in an Overstatement (Understatement) of Net Revenues ( 000) Unrecorded Differences Property tax assessment appeals provision Under accrual of lease inducement revenue Net effect of 2008 unadjusted difference turnaround effect Sub Total Total Unrecorded 6,700 (196) 6,504 (7,676) (1,172) Balance Sheet Effect of COSF Indexation Error The impact of the unrecorded COSF indexation liability of $10.4M when combined with the net revenue understatement (calculated above), results in an net overstatement of $9.2M in the accumulated surplus at December 31, 2009. The impact of the adjustment on the statement of operations is not material to the current year results and therefore is not reported above. Page 14
Required communications Handbook Section 5751 and other professional standards require the auditor to communicate certain matters to the Committee that may assist the Committee in overseeing management s financial reporting and disclosure process. We have summarized these communications as they apply to the City. Page 15 2008 financial statement audit results
Required communications Area Auditors responsibilities under Canadian generally accepted auditing standards (GAAS) The financial statements are the responsibility of management. Our audit is designed in accordance with Canadian Generally Accepted Auditing Standards to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. Comments Management is responsible for the preparation of the consolidated financial statements, which includes responsibilities related to internal control, such as designing and maintaining accounting records, selecting and applying accounting policies, safeguarding assets and preventing and detecting fraud and error. The auditor's responsibility is to express an opinion on the consolidated financial statements based on an audit thereof. An audit is performed to obtain reasonable but not absolute assurance as to whether the consolidated financial statements are free of material misstatement and, owing to the inherent limitations of an audit, there is an unavoidable risk that some misstatements of the consolidated financial statements will not be detected (particularly intentional misstatements concealed through collusion) even though the audit is properly planned and performed. The audit includes: obtaining an understanding of the entity and its environment including internal control in order to plan the audit and to assess the risk that the consolidated financial statements may contain misstatements that, individually or in the aggregate, are material to the consolidated financial statements taken as a whole; examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements; assessing the accounting principles used and their application; and assessing the significant estimates made by management. When the auditor's risk assessment includes an expectation of the operating effectiveness of controls, sufficient appropriate audit evidence has been obtained through tests of controls to support the assessment, but the scope of the auditor's review of internal control was insufficient to express an opinion as to the effectiveness or efficiency of the entity's controls. The auditors have expressed an opinion as to whether the consolidated financial statements present fairly in all material respects, in accordance with generally accepted accounting principles, the financial position, results of operations and cash flows of the entity. Page 16
Required communications Required communications Area Comments Our Overall Audit Strategy The auditor communicates with the audit committee aspects of the overall audit strategy: the general approach to the audit; areas of the consolidated financial statements identified by the auditor, management or the audit committee as having a high risk of material misstatement, and the auditor's response thereto; the materiality and audit risk levels on which the audit is based; the preliminary assessment of internal control, the planned extent of audit work related to internal control and the effect of any control reliance on year-end procedures; Refer to the Audit Strategy section Refer to the Materiality section For purposes of our audit of the consolidated financial statements, our audit scope is developed after considering inherent and control risks and the effectiveness of the City s internal controls. A variety of factors are considered when establishing individual audit scopes for the City including size, specific risks, the volume and types of transactions processed, changes in the business environment, internal audit activity, corporate monitoring controls in place, and other factors. We also consider the overall degree of commonality in processes at the City s locations and the degree of centralization of operations. Refer to the Accounting and Auditing Developments section other specific items likely to be of particular interest to the committee, including any extensions of the scope of the audit requested by the committee or management; the effects of new developments in accounting standards, or legislative or regulatory requirements, on the entity's financial reporting; other areas of concern that the committee or management identifies; the relevance of management representations to the audit evidence gathered by the auditor and the need to obtain certain management representations in writing; No other areas of concern have been brought to our attention Refer to our engagement letter Page 17 2008 financial statement audit results
Required communications Area Comments Major issues discussed with management in connection with initial or recurring retention We discuss with the Audit, Budget and Finance Committee or those charged with governance any major professional issues that were discussed (orally or in writing) with management in connection with our initial or recurring retention as the auditor, including, among other matters, any discussions regarding the application of accounting principles and auditing standards. None Our judgments about the quality of the City s accounting principles We discuss our judgments about the quality, not just the acceptability, of the accounting policies as applied in the City s financial reporting, including the consistency of the accounting policies and their application and the clarity and completeness of the financial statements and related disclosures. It is our opinion that the accounting principles selected by management are reasonable, consistent, and provide reliable and relevant accounting information. We believe the quality of accounting policies disclosed in the financial statements and applied in the financial reporting, including the consistency of their application, and the understandability and completeness of the financial statements complies with Canadian generally accepted accounting principles ( GAAP ) and Public Sector Accounting. Page 18
Required communications Area Comments Consultation with other accountants When we are aware that management has consulted with other accountants about auditing or accounting matters, we discuss with the Audit, Budget and Finance Committee or those charged with governance our views about significant matters that were the subject of such consultation. None of which we are aware. Disagreements with management We discuss with the Audit, Budget and Finance Committee or those charged with governance any disagreements with management, whether or not satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity s financial statements or the auditor s report. None. Serious difficulties encountered in dealing with management when performing the audit We inform the Audit, Budget and Finance Committee or those charged with governance of any significant difficulties encountered in dealing with management related to the performance of the audit. None. Page 19
Required communications Area Non-trivial recorded audit adjustments We provide the Audit, Budget and Finance Committee or those charged with governance with information about recorded adjustments arising from the audit that could in our judgment, either individually or in the aggregate, have a significant effect on the City s financial statements. Comments As a result of the audit, Ernst & Young identified non-trivial errors related to the obligation liabilities for the COSF and OC Transp pension plans as follows: COSF pension plan additional obligation $22M OC Transpo plan additional obligation 8M Net additional obligation recorded in 2009 $30M We do not believe the existence of these corrected errors causes concern regarding the accuracy of the statements or management s accounting. Unrecorded audit differences considered by management to be immaterial We inform the Audit, Budget and Finance Committee or those charged with governance about unrecorded audit differences accumulated by us (i.e., adjustments either identified by us or brought to our attention by management) during the current audit and pertaining to the latest period presented that were determined by management to be immaterial, both individually and in the aggregate, to the financial statements as a whole. Refer to Summary of audit differences section. Page 20
Required communications Area The adoption of, or a change in an accounting principle We determine that the Audit Committee or those charged with governance is/are informed about the initial selection of, and any changes in, significant accounting principles or their application when the accounting principle or its application, including alternative methods of applying the accounting principle, has a material effect on the financial statements. Comments During fiscal 2009, City was required to adopt accounting policies related to tangible capital assets and financial statement presentation. We have audited the tangible capital assets account in accordance with PS 3150. Accordingly, we have not modified our opinion as to consistency. Sensitive accounting estimates and disclosures The preparation of the financial statements requires the use of accounting estimates. Certain estimates and disclosures are particularly sensitive due to their significance to the financial statements and the possibility that future events may differ significantly from management s current judgments. We determine that the Audit Committee or those charged with governance is/are informed about management s process for formulating particularly sensitive accounting estimates and about the basis for our conclusions regarding the reasonableness of those estimates. The accounting estimates we considered as sensitive are those surrounding the valuation of the landfill obligation, contingencies, the provision for employee future benefits, property tax provision and property tax rebates. We have provided our views in the following section titled Audit Findings. Methods of accounting for significant unusual transactions and for controversial or emerging areas We determine that the Audit, Budget and Finance Committee or those charged with governance is/are informed about the methods used to account for significant unusual transactions and the effects of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. We are not aware of any significant unusual transactions recorded by the City or of any significant accounting policies used by the City related to controversial or emerging areas for which there is a lack of authoritative guidance. Page 21
Required communications Area Comments Fraud and illegal acts We communicate to the Audit, Budget and Finance Committee or those charged with governance fraud and illegal acts involving senior management and fraud and illegal acts (whether caused by senior management or other employees) that cause a material misstatement of the financial statements. We are not aware of any matters that require communication. Refer to section Fraud considerations and the risk of management override In addition we discuss fraud involving employees who have significant roles in internal control, questions regarding the honesty and integrity of management, and matters that may cause future financial statements to be materially misstated as well as any misappropriations perpetrated by lower-level employees, based on our understanding with the Audit, Budget and Finance Committee regarding the nature and extent of communications with the committee about such matters. Significant weaknesses in internal control We communicate all significant weaknesses in internal control that may have been identified during the course of our audit. No significant weaknesses were identified. A Summary of the audit approach After developing the overall audit strategy, we communicate with the Audit, Budget and Finance Committee aspects of the overall audit strategy that we believe would be helpful to you in discharging your responsibilities. Refer to section Audit Strategy Page 22
Required communications Area Comments Independence We communicate, at least annually, the following to the Audit, Budget and Finance Committee or those charged with governance: Refer to Appendix B Describe, in writing, all relationships between Ernst & Young and our associated entities and the City and its affiliates or persons in financial reporting oversight roles at the City that may reasonably be thought to bear on our independence; Discuss with the Audit Committee the potential effects of those relationships on independence; and Affirm, in writing, that we are independent in compliance with Rules of Professional Conduct / Code of Ethics of the Institute of Chartered Accountants of Ontario. Related party transactions Related party transactions identified by the auditor that are not in the normal course of operations and that involve significant judgments made by management concerning measurement or disclosure must be disclosed to the Audit, Budget and Finance Committee All related party transactions known to us are disclosed in the financial statements. Matters relating to component entities of the City When the financial statements of a City (primary entity) include financial information from financial statements of a component entity (a subsidiary, investee (other than a portfolio investment), or joint venture; or an entity whose financial information from financial statements is included with those of the primary entity), the auditor communicates with the Audit, Budget and Finance Committee those matters relating to the component entities that in the auditor's judgment are of significance in the context of the primary entity (for example, weaknesses in systems of internal control that have resulted, or could result, in material errors in the primary entity's consolidated financial statements). None of which we are aware. Page 23
Fraud considerations and the risk of management override We are responsible for planning and performing the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or by fraud (CICA 5135, The Auditor's Responsibility To Consider Fraud). Our audit procedures will encompass the requirements of CICA 5135: brainstorming, gathering information to facilitate the identification of and response to fraud risks and performing mandatory procedures to address the risk of management override (including examining journal entries, reviewing accounting estimates and evaluating the business rationale of significant unusual transactions). We evaluate the risk of management override using the fraud triangle and consider the actions management has taken to respond to those risks. We consider, among other things: Code of conduct/ethics Effective and independent oversight by Audit Committee Process for dealing with whistle-blower allegations Adequacy of internal audit oversight of activity Entity s risk assessment processes Role and oversight responsibilities of the Audit Committee: Management s assessment of the risks of fraud Programs and controls to mitigate the risk of fraud Process for monitoring multiple locations for fraud Management communication to employees on its views on business practices and ethical behavior attitude/rationalization Occupational Fraud and Abuse, by Joseph T. Wells, CPA, CFR (Obsidian Publishing Co, 1997); Fraud Examination, by W. Steve Albrecht (Thomson South-Western Publishing, 2003) Page 24
Appendix A: Independence letter June 15, 2010 Members of the Audit, Budget and Finance Committee Corporation of the City of Ottawa Dear Members of the Committee, We have been engaged to audit the financial statements of the City of Ottawa ( the City ) for the year ended December 31, 2009. Pursuant to Canadian generally accepted auditing standards, we communicate at least annually with you regarding all relationships between Ernst & Young and its related entities and the City and its related entities that, in our professional judgment, may reasonably be thought to bear on our independence. We have prepared the following comments to facilitate our discussion with you regarding independence matters. We are not aware of any relationships between Ernst and Young and the City that, in our professional judgment, may reasonably be thought to bear on our independence, since the engagement letter dated September 29, 2009. Canadian generally accepted auditing standards require that we confirm our independence to the committee in the context of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario. Accordingly, we hereby confirm that we are independent with respect to the City within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario as of date of this letter. The estimate of fees charged in 2009 for audit, audit-related services and non-audit services of the City is presented in the 2009 audit planning document. This report is intended solely for the use of the committee and management, and others within the City and should not be used for any other purposes. We look forward to discussing with you the matters addressed in this letter. Yours truly, Page 25 2009 financial statement audit results
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